Germany launches Europe’s first Sukuk

Saxony-Anhalt has become the first state government in Germany and Europe to issue a sub-sovereign bond under Islamic prin-ciples. The €100m bond – called Sukuk in Arabic – does not offer interest payments to its investors.

Saxony-Anhalt issued the five-year, AAA-rated bond in early August. Co-managers for the deal were US banking giant Citigroup and the Kuwait Finance House.

Sources at the co-managers said the Islamic bond was fully subscribed. They added that 60% of the issue went to investors in Bahrain and the United Arab Emirates and the other 40% to investors in Europe, particularly France and Germany.

While a number of Sukuks have been issued in the Gulf in the past two years, including a $150m issue for the state of Bahrain, this is the first such issue in Europe and represents an innovative move to attract a new range of investors. Sukuks provide a long-awaited vehicle for those who want to invest according to Islamic principles and their religious beliefs. This relatively untapped market is expected to have huge potential.

The Saxony-Anhalt issue represents a complex transaction designed in accordance with Islamic principles to provide the bond’s investors a return equal to Euribor, or the rate European banks use when lending to each other. Under the transaction, a trust based in the Netherlands has loaned the Saxony-Anhalt government €100m. Together with the co-managers, it also handled the mechanics of the bond sale.

Beyond paying back the principal in 2009, the Saxony-Anhalt government is obliged to give the Netherlands trust a share of income earned from renting out buildings which it owns.

The trust will in turn pass on the income – equal to the Euribor rate – to the bond’s investors. If Euribor rises, so will the bond investors’ return.

Edgar Kresin, treasurer at Saxony-Anhalt’s finance ministry, said the Sukuk’s flotation had to do with the state’s desire to be innovative and to reach Islamic investors, especially those who might consider investing in projects within the German state.

Both objectives were achieved, and Mr Kresin said talks between Islamic investors and Saxony-Anhalt about the financing of small infrastructure projects were already underway.

But the complexity of the Islamic bond sale, which caused several delays, has left Saxony-Anhalt undecided on whether to issue further Sukuks, according to Mr Kresin. “I wouldn’t rule it out, but for this year there will be no more. Next year, we’ll revisit the issue with all that we’ve learned from the initial sale,” he said.

This is not the first time Saxony-Anhalt, part of the former East Germany, has demonstrated innovation in finance. In 1998, it was the first of Germany’s 16 states to issue a sub-sovereign bond.

Since then, nearly all German states have followed suit, and experts say sub-sovereign bonds now make up around 50% of borrowing among German states.

Source: The Banker
http://www.thebanker.com/